Forex Hedge

AAA

DEFINITION of 'Forex Hedge'

A transaction implemented by a forex trader to protect an existing or anticipated position from an unwanted move in exchange rates. By using a forex hedge properly, a trader who is long a foreign currency pair can be protected from downside risk, while the trader who is short a foreign currency pair can protect against upside risk.

INVESTOPEDIA EXPLAINS 'Forex Hedge'

The primary methods of hedging currency trades for the retail forex trader is through spot contracts and foreign currency options. Spot contracts are the run-of-the-mill trades made by retail forex traders. Because spot contracts have a very short-term delivery date (two days), they are not the most effective currency hedging vehicle. In fact, regular spot contracts are usually the reason why a hedge is needed.

Foreign currency options are one of the most popular methods of currency hedging. As with options on other types of securities, foreign currency options give the purchaser the right, but not the obligation, to buy or sell the currency pair at a particular exchange rate at some time in the future. Regular options strategies can be employed, such as long straddles, long strangles, and bull or bear spreads, to limit the loss potential of a given trade.

Not all retail forex brokers allow for hedging within their platforms. Be sure to research the broker you use before beginning to trade.

RELATED TERMS
  1. Currency Pair

    The quotation and pricing structure of the currencies traded ...
  2. Forex Futures

    An exchange-traded contract to buy or sell a specified amount ...
  3. Daily Cut-Off

    In the forex market, a particular point in time specified by ...
  4. Interbank Market

    The financial system and trading of currencies among banks and ...
  5. Authorized Forex Dealer

    Any type of financial institution that has received authorization ...
  6. Cable

    Slang used among forex traders referring to the exchange rate ...
Related Articles
  1. thinkstock|istock
    Options & Futures

    A Primer On The Forex Market

  2. Forex Education

    Getting Started In Foreign Exchange ...

  3. Options & Futures

    Getting Started In Forex Options

  4. Forex Education

    Commodity Prices And Currency Movements

Hot Definitions
  1. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  4. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  6. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
Trading Center